Trump’s Tax Plan for Small Businesses, Freelancers, and Independent Contractors

How will President Trump’s tax policies affect your bottom line?

taxes for freelancersOn Tuesday we covered how the new administration will affect your taxes.

A new president has taken office, and a centerpiece of his campaign included promises to strengthen American businesses and create new jobs. While large corporations, such as Carrier and Ford, have already made commitments to boost U.S.-based operations in response to huge tax breaks, it’s natural to wonder whether favorable tax arrangements will be only available to mega-companies. If you’re a freelancer, independent contractor or small business owner, how will President Trump’s tax policies affect your bottom line?

Until legislative changes are actually passed, tax plans discussed so far are only campaign promises. But the owners of small and micro-businesses can study those proposals to make predictions about how their tax bills might shake out over the next four years.

Business Tax Promises

“The Trump tax plan does not include much detail yet, but it purports to provide economic stimulus by lowering business and personal taxes and simplifying the tax code,” says Grafton “Cap” Willey, managing director at CBIZ MHM, a national top 10 accounting and professional services provider.

If those promises pan out, small business owners and freelancers should be able to keep a larger share of their income, says Joe Heider, ChFC, CLU, founder and president of Cirrus Wealth Management in Cleveland. “In addition, his promise to revamp and dramatically reduce the cost of healthcare should result in a profound impact for small businesses.”

Translating to Small and Micro-Business

Without a crystal ball, there’s no clear answer yet as to how potential policy changes will affect independent contractors or small business owners. But that may depend on how you operate as a business entity—that is, whether your business is a corporation, LLC, or sole proprietorship, because some entities are considered “pass-through entities,” meaning the business income passes through to the personal tax return and is taxed at the personal rate.

“Most small businesses pay their business’s taxes at the individual tax rates,” Willey says. “While U.S. corporate tax rates are among the highest in the world at 35 percent, the individual wage taxes are even higher in many cases.”

That means that if corporate rates are reduced, but individual rates are not reduced, small business owners who pay business taxes at their individual rates would be paying disproportionately higher taxes than large businesses. Although some tax reform proposals did not address this issue, “the Trump proposal states that all business income would pay taxes at the 15 percent and 20 percent rates, which recognizes the parity issues,” Willey says.

In addition, because Trump has committed to reducing “government red tape and regulations,” small businesses stand to experience more financial relief, Heider says. “Small businesses tend to shoulder a disproportionate share of these costs.”

Watch and Wait

Although Trump may want to tackle tax reform during his first 100 days in office, it’s likely to take some time and negotiation, Willey says.

“Simplification, while a laudable goal, is sometimes elusive,” he adds. “There is a constant battle between simplification and fairness, and the definitions are often in the eyes of the beholders and their philosophical beliefs. What may be simple might not be fair, and what may be fair may not be simple. The other major problem with simplification is that it might get passed, but within a year, Congress will start tweaking it and making it more complex with adjustments. It happens every time we pass tax simplification.”

For now, the best course of action is to continue trying to maximize tax deductions and stay informed about negotiations in the House and Senate.

“Small businesses should stay on top of any changes once they take place,” Heider says. “Until the new tax law actually is passed with details, I believe it’s unwise to assume all campaign statements will come true.”

You might also like:
What to Do if You Can’t Pay Your Tax Bill
These 5 Things Make Tax Season Easier for Your Business
6 Free or Cheap Ways to File Your Taxes

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